Lerner paradox

In economics, the Lerner paradox is the theoretical possibility that imposing tariffs raises the world price of the import good, causing a deterioration of the tariff-imposing country's terms of trade.[1][2] Abba Lerner showed the possibility in his 1936 article.[3]

Conditions

In the large country case of a perfectly competitive market, imposing tariffs reduces the world price of the import good, improving the tariff-imposing country's terms of trade. However, under certain conditions, tariffs can have an opposite effect. Therefore, it is called a paradox.

  • According to Gene Grossman, a Lerner paradox occurs when the government spends most of its tariff revenue to purchase the import good.[1]
  • According to Pan-Long Tsai, a Lerner paradox occurs when the elasticity of the tariff-imposing country's import demand function is smaller than the government's spending share of its tariff revenue on the import good.[4]
  • Regarding the effect of tariffs on terms of trade, there is another paradox called the Metzler paradox. Koichi Hamada and Masahiro Endoh employ a general equilibrium model with multiple goods to demonstrate the conditions that both a Lerner paradox and a Metzler paradox do not occur.[5] There is a study building a model with quality and markups to explain both Lerner paradox and Metzler paradox within a single framework.[6]
  • Abba Lerner's 1936 article, demonstrating the possibility of a Lerner paradox, also shows the Lerner symmetry theorem.

See also

References

  1. ^ a b Grossman, G. (2016) "The Purpose of Trade Agreements." NBER Working Paper No. 22070, page 13, footnote 12.
  2. ^ Deardorff, A. Deardorffs' Glossary of International Economics: Lerner Paradox. Accessed on September 15, 2021.
  3. ^ Lerner, A. P. (1936) "The Symmetry Between Import and Export Taxes." Economica, 3(11): 306-313.
  4. ^ Tsai, Pan-Long (1989). "A note on the symmetry between Lerner's case and Metzler's paradox". Journal of International Economics. 27 (3–4): 373–379. doi:10.1016/0022-1996(89)90062-7.
  5. ^ Hamada, Koichi; Endoh, Masahiro (2005). "On the conditions that preclude the existence of the lerner paradox and the metzler paradox". Keio Economic Studies. 42 (1–2): 39–50.
  6. ^ Hayakawa, K., T. Ito, and H. Mukunoki (2019) "Lerner Meets Metzler: Tariff Pass-through of Worldwide Trade." IDE Discussion Paper No. 741.
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